Life is full of choices when it comes to what we want, need or can afford.
8 oz. “Barely Enough” or 64 oz. “Big Gulp”?
Back pack and pup tent or luxury 5-star resort?
Fuel efficient economy car or gas guzzling monster truck?
Every day there are choices to be made. And when it comes to house hunting here on The Space Coast, it’s no different.
Mainland or Beachside?
Condo or single family home?
Tile or wood floors?
The choices seem endless. But there’s one question that always weighs heavy on the minds of first time home buyers. It’s a good question and, if you’re a first time home buyer, one you should be asking.
Should I be buying a starter home or a forever home?
It’s not easy to determine. And it’s not exactly the same for everyone. A starter home and a forever home mean different things to different people. After all, one person’s starter home could be another person’s vision of a forever home.
But generally a starter home is a smaller, more affordable home that you typically plan on living in for around 5 years to save up some more money, build up equity and strengthen your credit even if you know you’ll probably outgrow it.
A forever home, on the other hand, is often more of a dream home where you picture yourself ultimately living in it for the rest of your life, or at least for the next 20 or 30 years. It’s that house that’s plenty big for now, has some room to grow into, is in the perfect location and either already has the upgrades you’re looking for or clearly would fit the bill with a few modifications.
But knowing which way to go isn’t easy.
On one hand, you want to get enough space that you don’t outgrow the house in a short period of time, particularly if you’re thinking about starting or growing a family in the not-too-distant future.
On the other hand, buy too much house too soon, and you could end up house rich and cash poor due to higher maintenance costs, higher taxes and higher energy bills with a larger home.
So, how do you figure it out?
Well, fortunately, you’re not the only one with this dilemma. It’s a common one.
And after helping many clients sort it all out I’ve come to find there are 7 key questions to ask yourself, that when answered, tend to make the path become more clear.
What can I really afford right now?
If you’re trying to decide if you should go ahead and purchase a starter home for now or if you should keep saving more money towards a forever home then the first question to ask yourself is “What can I really afford right now?”
This applies to your down payment and your monthly payment. Starter homes are typically going to be less expensive than forever homes and so you won’t need as much to put down. And of course the amount you do put down will affect how much your monthly payment is.
Also keep in mind that your payment is really more than just principal, interest, taxes and insurance. When you own a home you need to set aside a certain amount each month for maintenance, repairs and possibly a home owners association.
A good rule of thumb is to set aside about 1% of your home’s annual value each year. So, if you’re home is worth $210,000 then you should set aside about $2,100 per year or $175 per month.
Keep in mind that also applies to more expensive homes too. If you purchase a home that’s worth $420,000 then you should be able to set aside $4,200 per year or $350 per month towards maintenance and repairs.
If you’re not able to cover that extra 1% right now on a forever home purchase then you’re probably not quite ready for it.
You might be close though. If you’re lifestyle is enabling you to save money each month and you’re less than 5 years away from being able to purchase your forever home then you may just want to continue what you’re doing, keep saving for a larger down payment and go for your forever home in the near future.
What is the trend in interest rates?
Interest rates will also play a role in how much home you can afford. Although interest rates are still near historic lows that could change.
$1,000 per month at 4% buys you more house than $1,000 per month at 5%. If you can’t afford you’re forever home now but you can afford a starter home it could be beneficial to buy the starter home now while interest rates are low.
If interest rates drop in the future you can always consider refinancing your starter home at a lower rate. But if you choose not to purchase, and continue saving for a forever home instead, interest rates could rise over the next 5 years making the forever home still unaffordable for you at that time.
What type of home best fits my lifestyle today?
If you feel like you’ve dialed in your budget but you’re wondering if you should push that budget and try to squeeze into that forever home sooner than later be careful about focusing too much on finding the perfect home based on your “vision” of the future. Life has a funny way of sneaking up on us and sometimes things don’t always go as planned.
Although you can easily see yourself living in that forever home be realistic about what home best fits your lifestyle today. If you’re in a transitional stage of life where you might change jobs, get relocated or start a family down the road, then a starter home is probably a better bet.
When you’re looking at potential homes ask yourself, “What is it about this home that makes it seem like a starter home?” Will your children be teenagers soon and you can tell this home will be too small in the very near future? Will it be in the wrong school district in a couple years as your children age? Does it have enough space but needs too much work for you to take on at this time? If so, a forever home might be what you really need.
If you’re in a place of stability already then maybe the forever home is the best choice. If you’re confident in your employment and you’re not expecting your family to grow any larger then it is worth considering.
What’s going on in my local market?
Aside from your own personal budget and lifestyle there’s always the investment aspect of a home purchase.
If you find yourself more interested in putting down roots and staying put for 20 or 30 years you’ll have plenty of time to ride out fluctuations in the market and still benefit from your home purchase as an investment. You might be happier just saving up a little more money for the down payment and then reaching for the top. If you don’t need to make a sizable profit on your home in a relatively short period of time it’s another good indication that a forever home is the better fit for you.
But if you’re leaning towards the starter home at this point that’s more of a short term play and so you need to be aware of what’s going on in your local market. When evaluating starter homes think about what will work for you now but also how attractive a particular home could be to the next buyer in the future.
The market may be hot now but could be cooled off in 5 years when you’re ready to sell. Take a look at what homes are currently in demand and which ones are lingering on the market.
Find out where the local market is in the real estate cycle. Is it near the bottom of a cycle or near the top? What if you can’t sell your starter home 5 years from now when you’re ready to move on?
Could I rent out this home in the future?
One of the beautiful things about starter homes is that they also tend to make good rental properties. So if you choose the starter home route and for some reason you’re unable to sell it 5 years from now you could probably rent it out.
Just like a starter home is a good fit for you if you’re in a transitional stage of life right now it would also be a good fit for someone else in a transitional stage of their life down the road. They could be your future buyer or your future tenant.
Of course you’ll want to give that some thought and make sure you’re comfortable with being a landlord. But if you think you are, the starter home you purchase today, that becomes a rental a few years from now, could provide the funds you need for the eventual purchase of your forever home in the future. How’s that for coming full circle?
What is my gut feeling?
Ultimately, all the number crunching, analyzing and research is only going to get you so far. If you’ve found a place that you absolutely love and can afford listen to what your gut is telling you.
And, on the flip side, if you’re looking at a place and saying to yourself, “I don’t know about this?” also listen to what your gut is telling you.
“Follow your instincts. That’s where true wisdom manifests itself.” —Oprah Winfrey
Buying a home is much more than just an investment vehicle. Whether it’s a starter home or a forever home it’s going to be a place where memories are made.
Think it through and get answers to these questions. But in the end trust your intuition.
If you want some more help figuring it out click here to schedule a free strategy call.